The U.K. government and retirement industry should work on further developing and testing a "superfund" framework for corporate pension funds, said the Pensions and Lifetime Savings Association's defined benefit task force.
In its final report, the task force outlined a range of options to help the almost 6,000 U.K. corporate funds deal with underfunding, weak employer backing (known as covenants) and lack of scale.
As part of its work, the task force undertook employer research to ascertain the level of interest in consolidation of funds, with 65% saying they would support the principle of consolidation. Support for shared administration was at 72% and 66% for shared external advisers. Shared governance was supported by 64% of respondents, with 54% in favor of asset pooling under one money manager.
"The task force's analysis of a potential superfund framework moves forward significantly the case for considering how employers can be enabled to swap covenants for cash," said Ashok Gupta, chair of the task force, in a statement accompanying the final report. "We call on industry and the government to work with us to further develop and test this framework."
The report makes three main recommendations on the U.K.'s DB market. The first is a requirement to publish an annual statement showing the funds are operating with best practices in areas such as governance, investment performance and cost transparency. The Pensions Regulator "could also use this mechanism to ensure trustees explicitly consider the potential benefits of consolidation for their scheme," said the report.
The second recommendation is to make it easier to standardize and simplify benefits. "The current complexity of some schemes ... is not only a barrier to greater efficiency for all schemes and better member communication, but also remains a practical obstacle to consolidating schemes in a way which maximizes the potential gains from economies of scale," said the report.
The third recommendation is to help pension funds struggling with both underfunding and employer covenant risk. It would allow them to "exchange an unknown and intangible covenant for stronger and more secure backing from a larger sponsor. A superfund vehicle could consolidate assets and liabilities of participating pension schemes, reducing the risk to members' benefits and offering a new option which could release employers from legacy DB obligations and allow them to invest in business growth."
The report is available on the PLSA website.